The long season of political slugfest is over for the time being with the Lok Sabha elections out of the way. Much of it was just noise, except for one recurring theme — income inequality. It was used by the ruling regime and the Opposition to take cheap potshots at each other, but it is a serious issue that needs deep introspection. One hopes next month’s Budget will take some decisive steps to at least signal that the government means business.
The numbers show inequality has deepened in recent years. Consider this: the top 10% of the urban population spends over three times what the median person spends. According to the 2022-23 Household Consumption Expenditure Survey, the gap is 2.6 times in rural areas.
It’s obvious that no country can prosper and remain a vigorous democracy when so few have so much and so many have so little. The issue of income and wealth inequality is one of the great moral, economic, and political crises that we face — and it must be dealt with.
One big indicator of growing inequality is that companies focusing on premium products have done better than those catering to lower market segments. For example, Nestlé, serving primarily premium products, has fared better than Hindustan Unilever, which has a broader spread of brands. Within that spread, Unilever’s premium brands have been doing much better.
In this context, economists like Thomas Piketty are right in saying that inequality has become an “epidemic” in India. The top 1% of India today holds 40% of the country’s wealth — 21 billionaires have the same wealth as 700 million Indians, according to Oxfam. The “State of Working India Report 2023” shows 42% of graduates under 25 are unemployed. Wage disparities are another driver of inequality. NSSO data shows that the wages of salaried workers and labourers have been stagnating, or even declining.
The solution, however, does not lie in robbing Peter to pay Paul and adopt “Robin Hood economics”. Many have suggested the imposition of a wealth tax or inheritance tax to generate funds for the poor. But it is an idea that harkens back to the worst aspects of India’s socialist past. Four decades ago, the Congress had abolished such taxes as collections from them were a pittance. The then finance minister acknowledged in his Budget speech that collections from the tax were “only about `20 crore” and its cost of administration was “relatively high”.
The idea should not be to make the rich poorer, as that is a zero-sum game. Such a discourse forgets that the wealthy also generate jobs and fund innovation. And, to borrow from Milton Friedman, it ignores the danger that blind redistribution could destroy the incentive to create wealth. The core issue of inequality can be addressed by expanding the economic pie so that the poor benefit as well. The LS poll results showed that voters were angry at lack of opportunities, not because a few Indians are very rich. In any case, economic growth has a far greater impact on poverty alleviation than inequality.
A cornerstone of rampant inequality is the pervasive scarcity of jobs, and no amount of government handouts can substitute for jobs. The unemployment rate among the educated remains a worrisome trend. According to the Periodic Labour Force Survey (PLFS) 2022-23, the unemployment rate is highest among graduates at 13.4%, followed by those with diplomas at 12.2%, and 12.1% for postgraduates. Governments — whether Bharatiya Janata Party or Congress-led — have launched reforms and pushed for economic growth over the past three decades, but they have failed to generate enough employment and move the workforce from low-income farming to well-paying non-farm jobs. Agriculture continues to employ more than 45% of the workforce but contributes less than 20% to gross value added, resulting in high inequality of wealth and income.
Projections indicate that over the next decade, India will need to create 90 million non-farm jobs to manage the inevitable migration of labour from agriculture and provide meaningful employment opportunities to the working-age population. One of the reasons for poor remuneration is poorly designed contractual jobs. For example, many states appoint schoolteachers on contract with a starting salary of just `7,500, while the minimum wage for them is expected to be `18,000. There was a recent report indicating that many delivery boys for Amazon earn `11,000-12,000 a month.
In this context, the government could look at industry body CII’s suggestion for an employment-linked incentive scheme for labour-intensive and high-growth potential sectors. India also needs to significantly step up women’s participation in the workforce, which stands at close to 29%. Even a late entrant to the women empowerment journey like Saudi Arabia stands at 35%. A study by the National Family Health Survey indicates that advancing gender equality could potentially lead to a 30% increase in India’s GDP.
The immediate task before the government is to look at a big expansion of budgetary allocations to public healthcare provisioning, focusing on building primary and secondary health infrastructure. The top 5% in rural India spends 141 times the amount spent on hospitalisation expenses by the bottom 5%. This shows most Indians cannot afford hospitalisation. Only 31.5% of hospitals and 16% of hospital beds are in rural areas, where 75% of the population lives. Most developed countries, such as Germany, spend about 7% of their GDP on health. But India spends less than 2.5% on health.
Another area is education. The huge inequalities of opportunity can be seen from the richest 5% of the urban population spending six and a half times more than those in the 40th-50th percentile of urban India on education. The gap is 19% when it comes to people in rural India. Most developed countries spend around 6% of GDP on education; India spends hover around 2.5 to 3%.
In nominal dollars, India’s per capita income is lower than that of all but one (Bangladesh) of the 50 largest economies, and slightly ahead of Cambodia, which is not flattering company. And certainly, that’s not a good advertisement for a Viksit Bharat. Over to the Budget.